Fixed Income Asset Allocation Insights: December 2017

Strong earnings and low default rates should continue into 2018

We are leaving our target allocation unchanged, after increasing our exposure to emerging markets debt last month. Spreads widened during the early and mid-part of the month, as sector specific selling in high yield segments extended into other areas. However, spreads fell as oil traded higher on OPEC-related news and as US tax reform became increasingly likely. For 2018, we see the potential for some treasury rate volatility. However, we expect upward pressure more toward short-term rates and the curve to continue its flattening trend. We remain constructive on emerging markets debt as well as investment grade and high yield corporate debt because we expect strong earnings trends to continue and the default backdrop to remain benign.

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